-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CFrap0kUKmt2TRTsor2t9uBZAIQiJJm6NtbKrbVsAf19x0cPOrwd4M13+bGANBhF 39jbnDDlUlD6BfBeao6Hvw== 0001047469-99-021214.txt : 19990518 0001047469-99-021214.hdr.sgml : 19990518 ACCESSION NUMBER: 0001047469-99-021214 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BERKSHIRE REALTY CO INC /DE CENTRAL INDEX KEY: 0000869446 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 043086485 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10660 FILM NUMBER: 99628140 BUSINESS ADDRESS: STREET 1: 470 ATLANTIC AVE CITY: BOSTON STATE: MA ZIP: 02210 BUSINESS PHONE: 8888670100 MAIL ADDRESS: STREET 1: 470 ATLANTIC AVE CITY: BOSTON STATE: MA ZIP: 02210 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 ----------------------------------------------- OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- ----------------- Commission file number 1-10660 ------------------------------ Berkshire Realty Company, Inc. - -------------------------------------------------------------------------------- Delaware 04-3086485 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS employer incorporation or organization) identification no.) One Beacon Street, Boston, Massachusetts 02108 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (617) 646-2300 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -----------------
ASSETS March 31, December 31, 1999 1998 -------------- -------------- (Unaudited) Real estate assets: (Note 2) Multifamily apartment complexes, net of accumulated depreciation $ 933,801,769 $ 919,486,703 Mortgage loans, net of purchase discounts 2,389,069 2,376,227 Land and construction-in-progress 15,510,750 10,974,377 Land held for future development 5,745,756 5,657,038 -------------- -------------- Total real estate assets 957,447,344 938,494,345 Cash and cash equivalents 15,957,023 12,366,880 Mortgage-backed securities, net ("MBS") 4,468,590 4,936,979 Note receivable 4,000,000 7,500,000 Escrows 15,810,742 16,305,255 Deferred charges and other assets 18,787,635 19,854,353 Workforce and other intangible assets, net of accumulated amortization 6,773,714 9,449,030 -------------- -------------- Total assets $1,023,245,048 $1,008,906,842 -------------- -------------- -------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Credit agreement (Note 3) $ 173,100,000 $ 135,100,000 Construction loan (Note 3) 11,440,613 11,362,891 Mortgage notes payable (Note 3) 425,122,294 426,236,427 Tenant security deposits and prepaid rents 8,150,029 8,309,738 Accrued real estate taxes, insurance, other liabilities and accounts payable 21,502,369 25,218,826 -------------- -------------- Total liabilities 639,315,305 606,227,882 -------------- -------------- Minority interest in operating partnership 65,656,537 69,661,451 Commitments and contingencies (Note 2) - - Shareholders' equity: Preferred stock ("Preferred Shares"), $0.01 par value; 60,000,000 shares authorized, 2,737,000 shares issued 27,370 27,370 Common stock ("Shares"), $0.01 par value; 140,000,000 Shares authorized and 37,234,088 and 37,219,897 Shares issued, respectively 372,341 372,199 Additional paid-in capital 366,136,378 375,186,299 Accumulated deficit (44,276,056) (38,550,284) Loans receivable - officers (2,243,752) (2,275,000) Less common stock in treasury, at cost (506,497 Shares) (1,743,075) (1,743,075) -------------- -------------- Total shareholders' equity 318,273,206 333,017,509 -------------- -------------- Total liabilities and shareholders' equity $1,023,245,048 $1,008,906,842 -------------- -------------- -------------- --------------
The accompanying notes are an integral part of the Consolidated Financial Statements. 2 BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS -----------------
For the Three Months Ended March 31, ----------------------------------- 1999 1998 ----------- ----------- (Unaudited) (Unaudited) Revenue: Rental $48,815,071 $39,218,665 Interest from mortgage loan 83,428 84,162 Interest income from MBS 111,279 166,055 Management fees and reimbursements (Note 9) 797,505 951,804 Other interest income 475,197 594,212 ----------- ----------- Total revenue 50,282,480 41,014,898 ----------- ----------- Expenses: Property operating 11,069,510 9,152,843 Repairs and maintenance 3,411,331 2,183,270 Real estate taxes 4,837,994 3,851,003 Property management operations 2,391,365 2,046,929 General and administrative 1,490,613 1,679,885 Interest (Note 3) 11,217,278 8,011,390 Costs associated with strategic alternatives 3,048,373 - Amortization of acquired workforce and intangible assets 2,675,316 3,258,049 Depreciation and amortization 15,878,837 12,495,534 ----------- ----------- Total expenses 56,020,617 42,678,903 ----------- ----------- Loss from operations before joint venture income, gain on sales of assets and minority interest (5,738,137) (1,664,005) Joint venture income - 51,948 Gain on sales of assets - 512,732 Minority interest in operating partnership 1,551,928 470,775 ----------- ------------ Net loss (4,186,209) (628,550) Income allocated to preferred shareholders (1,539,563) (1,539,563) ----------- ----------- Net loss allocated to common shareholders $(5,725,772) $(2,168,113) ----------- ----------- ----------- ----------- Earnings per common share (basic and diluted): Net loss per common share $ (.16) $ (.06) ----------- ----------- ----------- ----------- Weighted average shares 36,714,346 36,615,474 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of the Consolidated Financial Statements. 3 BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the Three Months Ended March 31, 1999 (Unaudited)
Series 1997-A Convertible Additional Loans Preferred Stock at par Common Stock at par Paid-in Accumulated Receivable- Shares Amount Shares Amount Capital Deficit Officers ----------- ------ ---------- -------- ------------ ------------ ----------- Balance, December 31, 1998 2,737,000 $27,370 36,713,400 $372,199 $375,186,299 $(38,550,284) $(2,275,000) Net loss - - - - - (4,186,209) - Stock issuance costs - - - - (9,946) - - Preferred dividends - - - - - (1,539,563) - Conversion of Units to Common Shares - - 14,191 142 101,456 - - Stock purchase loans - forgiveness - - - - - - 31,250 Adjustment for minority interest ownership of Operating Partnership - - - - (238,895) - - Common dividends - - - - (8,902,538) - - --------- ------- ---------- -------- ------------ ------------ ----------- Balance, March 31, 1999 2,737,000 $27,370 36,727,591 $372,341 $366,136,376 $(44,276,056) $(2,243,750) --------- ------- ---------- -------- ------------ ------------ ----------- --------- ------- ---------- -------- ------------ ------------ -----------
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the Three Months Ended March 31, 1999 (Unaudited)
Treasury Stock at cost Total Balance, December 31, 1998 $(1,743,075) $333,017,509 Net loss - (4,186,209) Stock issuance costs - (9,946) Preferred dividends - (1,539,563) Conversion of Units to Common Shares - 101,598 Stock purchase loans - forgiveness - 31,250 Adjustment for minority interest ownership of Operating Partnership - (238,895) Common dividends - (8,902,538) ----------- ------------ Balance, March 31, 1999 $(1,743,075) $318,273,206 ----------- ------------ ----------- ------------
The accompanying notes are an integral part of the Consolidated Financial Statements. 4 BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------
For the Three Months Ended March 31, ---------------------------------- 1999 1998 ----------- ----------- (Unaudited) (Unaudited) Cash flows from operating activities: Net loss $ (4,186,209) $ (628,550) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 15,878,837 12,495,534 Amortization of intangible assets and costs related to workforce acquired 2,675,316 3,258,049 Joint venture income - (51,948) Distributions received from joint venture - 51,948 Gain on sales of assets - (512,732) Stock purchase loan forgiveness 31,250 36,250 Amortization of purchase discounts (40,520) (37,742) Minority interest in operating partnership (1,551,928) (470,775) Amortization of deferred financing costs 415,723 345,748 Decrease in operating escrows and other assets 1,102,888 1,064,456 Decrease in accrued real estate taxes, insurance, other liabilities and accounts payable (3,986,457) (1,870,816) Increase (decrease) in tenant security deposits, prepaid rents and escrows (159,709) 794,102 ----------- ----------- Net cash provided by operating activities 10,179,191 14,473,524 ----------- ----------- Cash flows from investing activities: Cost to acquire properties (25,615,141) (72,555,603) Proceeds from sale of properties - 14,918,614 Recurring capital expenditures (2,891,848) (1,145,496) Rehabilitation and non-recurring capital expenditures (1,638,518) (3,357,665) Land acquisition and construction in progress (4,598,657) (4,539,943) Distributions received from joint venture in excess of earnings - 443,894 Distribution from sale of joint venture asset, net - 14,922,557 Principal collections on note receivable 3,500,000 - Principal collections on MBS 474,452 551,387 Principal collections on mortgage loan 21,615 20,157 Escrow established at acquisition of properties - (249,418) ------------ ------------ Net cash used for investing activities (30,748,097) (50,991,516) ------------ ------------
Continued 5 BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Three Months Ended March 31, ----------------------------------- 1999 1998 ------------ ------------ (Unaudited) (Unaudited) Cash flows from financing activities: Advances under credit agreement $38,000,000 $49,000,000 Advances under construction loan 77,722 3,305,306 Payment of financing costs (32,210) (1,440,378) Costs associated with issuance of stock (9,946) (226,980) Dividends to preferred shareholders (1,539,563) (1,539,563) Principal payments on mortgage notes payable (1,114,133) (969,278) Proceeds from the exercise of stock warrants - 6,402 Dividends to common shareholders (8,902,538) (8,521,390) Distributions to minority unitholders (2,320,283) (1,658,586) ----------- ------------ Net cash provided by financing activities 24,159,049 37,955,533 ----------- ------------- Net increase in cash and cash equivalents 3,590,143 1,437,541 Cash and cash equivalents, beginning of period 12,366,880 9,859,110 ----------- ------------ Cash and cash equivalents, end of period $15,957,023 $ 11,296,651 ----------- ------------ ----------- ------------ Supplemental cash flow disclosure: Cash paid for interest during period $11,164,074 $ 8,641,229 ----------- ------------ ----------- ------------ Interest capitalized during period $ 324,572 $ 419,722 ----------- ------------ ----------- ------------ Supplemental disclosure of non-cash financing and investing activities: Property acquisitions $(25,615,141) $(113,473,162) Debt assumed in property acquisitions - 24,238,044 Units issued for property acquisitions - 16,679,515 ------------ ------------ Cash to acquire property $(25,615,141) $(72,555,603) ------------ ------------ ------------ ------------ Conversion of Units to Shares $ 101,598 $ 377,233 ------------ ------------ ------------ ------------ Shares issued in satisfaction of note payable - 2,130,000 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of the Consolidated Financial Statements. 6 BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. ORGANIZATION Berkshire Realty Company, Inc. and Subsidiaries (the "Company") was formed on April 26, 1990 as an equity real estate investment trust ("REIT") and commenced operations on June 27, 1991. The Company has an infinite life; however, the Company's Restated Certificate of Incorporation, as amended, requires the Company's Board of Directors (the "Board") to prepare and submit on or before December 31, 1998, a Plan of Liquidation (the "Plan") to the shareholders, together with the Board's recommendation whether to adopt or reject the Plan. As a result, the Company engaged two investment banking firms, Lazard Freres & Co. LLC and Lehman Brothers Inc., to assist the Company in the exploration and evaluation of strategic alternatives. These alternatives included (but were not limited to) potential sale or merger of the Company or the adoption of the Plan. The Company has filed preliminary proxy materials with the Securities and Exchange Commission relating to the Plan, which the Board of Directors has recommended the shareholders not approve. On April 13, 1999, the Company and Berkshire Realty Holdings, L.P., a partnership formed by Chairman of the Board, Douglas Krupp, and affiliates of Blackstone Real Estate Advisors and Whitehall Street Real Estate Limited Partnership XI (an affiliate of Goldman, Sachs & Co.), entered into a definitive merger agreement. The Company's Board of Directors has approved the merger agreement based on a recommendation from a special committee of the Board comprised of four independent directors. Pursuant to the terms of the agreement, if the merger is consummated, shareholders of Berkshire will receive $12.25 in cash per share of common stock. Limited partners in BRI OP Limited Partnership ("Operating Partnership"), Berkshire's Operating Partnership, will be able to elect to receive the same cash consideration per Operating Partnership unit ("Unit") or become limited partners of the acquiring partnership. The transaction must be approved by a majority of shareholders. The transaction, if approved, is scheduled to close in the fourth quarter of 1999. 2. SIGNIFICANT ACCOUNTING POLICIES These financial statements reflect the consolidated financial position, results of operations, changes in shareholders' equity and cash flows of the Company, using the historical cost of assets, liabilities and results of operations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this report on Form 10-Q pursuant to the Rules and Regulations of the Securities and Exchange Commission. In the opinion of management, the disclosures contained in this report are adequate to make the information presented not misleading. See Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1998 for additional information relevant to significant accounting policies followed by the Company. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments necessary to present fairly the Company's financial position as of March 31, 1999 and the results of its operations for the three months ended March 31, 1999 and 1998 and cash flows for the three months ended March 31, 1999 and 1998. The results of operations for the three months ended March 31, 1999 are not necessarily indicative of the results which may be expected for the full year. See Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report. Continued 7 BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. MULTIFAMILY AND RETAIL PROPERTY As of March 31, 1999, the Company had investments in 82 apartment communities in eight states totaling 24,387 units. The Company was also engaged in the development of apartment communities and currently has 655 units under construction. The following summarizes the carrying value of the Company's multifamily apartment complexes (in thousands):
March 31, December 31, 1999 1998 ---------- ---------- Land $ 153,843 $ 151,282 Buildings and improvements 789,506 768,270 Appliances, carpeting and equipment 176,134 169,812 ---------- ---------- Total multifamily property 1,119,483 1,089,364 Accumulated depreciation (185,681) (169,878) ---------- ---------- $ 933,802 $ 919,486 ---------- ---------- ---------- ----------
ACQUISITIONS On January 7, 1999, the Company acquired Granite Run Apartments, a 264-unit apartment community located in Baltimore, Maryland, for $25.6 million. The Company paid cash to acquire the property. Granite Run was the second of four properties that the Company was contractually obligated to acquire from Questar Builders, Inc. The Company is obligated, upon satisfaction of certain conditions, to acquire two additional newly-developed properties totaling 405 units for an approximate cost of $58.9 million from Questar Builders, Inc. The properties were in various stages of development as of March 31, 1999. It is expected that the first property will be acquired in 1999 and the remaining property will be acquired in 2000. DEVELOPMENT In December, 1997, the Company purchased a 60-acre parcel of land in Atlanta, Georgia for approximately $5.8 million for the development of Berkshires at Deerfield, a 478 unit apartment community. Construction began in the third quarter of 1998. The total cost of the project to date is approximately $8.3 million. Construction is expected to be completed in October, 2000 at an estimated cost of $34.9 million. On April 29, 1998, the Company acquired 12.6 acres located near Clemson, South Carolina for approximately $571,000. Construction of Berkshire Commons, a 177-unit student housing development, began in the third quarter of 1998 on this site. The total cost of the project to date is approximately $7.2 million. Construction is expected to be completed in August, 1999 at an estimated cost of $14.1 million. The Company also owns two other parcels of land located in Greenville, South Carolina. Development plans are under consideration for these sites. Continued 8 BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. DEBT AGREEMENTS As of March 31, 1999, the Company had a credit agreement with nine participating commercial banks for a $180 million unsecured revolving line of credit ("Credit Agreement"). The following summarizes the Company's borrowings on the Credit Agreement as of March 31, 1999:
Contract Contract Principal Borrowings Start Date End Date Interest Rate Amount ---------- ---------- -------- ------------- ------ LIBOR contract 05/13/99 06/11/99 6.2062% $ 46,100,000 LIBOR contract 04/30/99 06/01/99 6.1750% 3,000,000 LIBOR contract 05/07/99 06/04/99 6.2062% 124,000,000 ----------- $173,100,000 ----------- -----------
Subsequent to March 31, 1999, the Company borrowed the remaining $6.9 million on the credit agreement at an interest rate of 6.2062% with a contract end date of June 11, 1999. The Company has a construction loan commitment of $13.1 million with two commercial banks to fund the completed development of Berkshires at Crooked Creek ("Construction Loan"). The agreement requires monthly interest payments at a variable rate set at 150 basis points over LIBOR. The outstanding principal balance will be due June 30, 1999. It is the Company's intention to extend this loan to December 31, 1999. As of March 31, 1999, the Company's borrowings on the Construction Loan totaled $11,440,613 and had an interest rate of 6.4375% with a contract end date of May 17, 1999. 5. EARNINGS PER SHARE In accordance with Financial Accounting Standards Board Statement No. 128 ("FAS 128"), "Earnings Per Share", the Company has presented basic and diluted net income per share on the Consolidated Statements of Operations. The net income and weighted average shares used in the calculations are presented below:
Three Months Ended March 31, ------------------------------- 1999 1998 ---------- ---------- Earnings per common share (basic and diluted): Net loss allocated to common shareholders $(5,725,772) $(2,168,113) ---------- ---------- ---------- ---------- Weighted average shares 36,714,346 36,615,474 ---------- ---------- ---------- ----------
Continued 9 BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) 6. PRO-FORMA RESULTS (UNAUDITED) The following unaudited pro-forma operating results for the Company have been prepared as if the 1999 and 1998 property acquisitions, dispositions and equity transactions had occurred on January 1, 1998. Unaudited pro-forma financial information is presented for informational purposes only and may not be indicative of what the actual results of operations of the Company would have been had the events occurred as of January 1, 1998, nor does it purport to represent the results of operations for future periods. (Dollars in thousands except per share amounts).
For the Three Months Ended ----------------------------------- March 31, March 31, 1999 1998 ---------- ----------- Revenue $50,333 $47,730 Expenses including depreciation $56,420 $50,925 ------- ------- Net loss allocated to common shareholders $(6,087) $(3,195) ------- ------- ------- ------- Net loss per weighted average common share $(.17) $(.09) ------- ------- ------- -------
7. SEGMENT REPORTING The Company has adopted Statement of Financial Accounting Standards No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and require that those enterprises report selected information about operating segments in interim reports issued to shareholders. The Company operates and develops apartment communities in Florida, Texas and the Mid-Atlantic and Southeast regions of the United States which generated rental income through the leasing of apartment units. The Company separately evaluates the performance of each of its apartment communities. However, because each of the apartment communities has similar economic characteristics, facilities, services and tenants, the apartment communities have been aggregated into a single real estate segment. The Company evaluates performance based upon net operating income ("NOI") from the combined properties in the segment. NOI is defined by the Company as rental revenue less property operating expenses, including repairs and maintenance and real estate taxes. Accordingly, NOI excludes non-property revenue and expenses included in the determination of net income. NOI for the combined properties in the segment for the three month periods ended March 31, 1999 and 1998 was as follows:
1999 1998 ----------- ----------- Rental Revenue Multifamily $48,815,071 $39,155,663 Retail (a) - 63,002 ----------- ----------- Total 48,815,071 39,218,665 Operating Expenses Multifamily 19,318,835 15,088,892 Retail (a) - 98,224 ----------- ----------- Total 19,318,835 15,187,116 ----------- ----------- Net Operating Income $29,496,236 $24,031,549 ----------- ----------- ----------- -----------
10 BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) 7. SEGMENT REPORTING - Continued The following is a reconciliation of net operating income to loss from operations before joint venture income, gain on sale of assets and minority interest:
1999 1998 ------------ ----------- Net operating income $ 29,496,236 $24,031,549 Revenue: Management fees and reimbursements 797,505 951,804 Interest 669,904 844,429 Expenses: Depreciation and amortization (18,554,153) (15,753,583) General and administrative (1,490,613) (1,679,885) Property management operations (2,391,365) (2,046,929) Interest (11,217,278) (8,011,390) Costs associated with strategic alternatives (3,048,373) - ------------ ------------ Loss from operations before joint venture income, gain on sales of assets and minority interest $ (5,738,137) $ (1,664,005) ------------ ------------ ------------ ------------
(a) The Company completed the liquidation of the retail portfolio in 1998. 8. SUBSEQUENT EVENTS On April 13, 1999, the Company and Berkshire Realty Holdings, L.P., a partnership formed by Chairman of the Board, Douglas Krupp, and affiliates of Blackstone Real Estate Advisors and Whitehall Street Real Estate Limited Partnership XI (an affiliate of Goldman, Sachs & Co.), entered into a definitive merger agreement. The Company's Board of Directors has approved the merger agreement based on a recommendation from a special committee of the Board comprised of four independent directors. Pursuant to the terms of the agreement, if the merger is consummated, shareholders of Berkshire will receive $12.25 in cash per share of common stock. Limited partners in Berkshire's Operating Partnership will be able to elect to receive the same cash consideration per Unit or become limited partners of the acquiring partnership. The transaction must be approved by a majority of shareholders. The transaction, if approved, is scheduled to close in the fourth quarter of 1999. 11 BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A. OVERVIEW: The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein and the Company's Annual Report on Form 10-K/A for the year ended December 31, 1998. Capitalized terms used herein and not otherwise defined have the meanings ascribed to them in the Notes to the Consolidated Financial Statements included elsewhere herein. The Company is a real estate investment trust ("REIT") whose operations consist primarily of the acquisition, renovation, rehabilitation, development and operation of apartment communities located in Florida, Texas, the Mid-Atlantic and Southeast regions of the United States. As of March 31, 1999, the Company owned 82 apartment communities consisting of 24,387 units. The Company has commenced construction on 655 multifamily units and owns two parcels of land for future development. The Company has also contracted to acquire two additional newly-developed properties from an affiliate of Questar Builders, Inc. totaling 405 units. The Company also entered into a Development Acquisition Agreement with Questar Builders, Inc. which grants the Company an exclusive right to acquire all apartment projects developed in the Mid-Atlantic Region by such affiliates which meet the Company's acquisition and development criteria. COMPANY STRATEGY: Since the organization of the Company in 1990, the Company's Certificate of Incorporation, as amended, has required the Board of Directors to submit a Plan of Liquidation (the "Plan") to the stockholders prior to the end of 1998, together with the Board's recommendation whether to adopt or reject the Plan. As a result, the Company engaged two investment banking firms to assist in the exploration and evaluation of strategic alternatives. Among others, these alternatives included the potential sale or merger of the Company or the adoption of a Plan of Liquidation. The Company has filed preliminary proxy materials with the Securities and Exchange Commission relating to the Plan, which the Board of Directors has recommended the shareholders not approve. In addition, the Company also adopted severance and retention programs and amended certain employment agreements designed to encourage the continued employment of key personnel during the exploration and evaluation of these alternatives. On April 13, 1999, the Company and Berkshire Realty Holdings, L.P., a partnership formed by Chairman of the Board, Douglas Krupp, and affiliates of Blackstone Real Estate Advisors and Whitehall Street Real Estate Limited Partnership XI (an affiliate of Goldman, Sachs & Co.), entered into a definitive merger agreement. The Company's Board of Directors has approved the merger agreement based on a recommendation from a special committee of the Board comprised of four independent directors. Pursuant to the terms of the agreement, if the merger is consummated, shareholders of Berkshire will receive $12.25 in cash per share of common stock. Limited partners in Berkshire's Operating Partnership can elect to receive the same cash consideration per OP Unit or become limited partners of the acquiring partnership. The transaction must be approved by a majority of shareholders. The transaction, if approved, is scheduled to close in the fourth quarter of 1999. UPREIT REORGANIZATION: The Company reorganized as an Umbrella Partnership ("UPREIT") on May 1, 1995 when the Company contributed substantially all of its assets subject to all liabilities to BRI OP Limited Partnership. The Company, in its capacity as the Special Limited Partner and through its ownership of Berkshire Apartments, Inc. as General Partner, holds 79.19% of the Operating Partnership interests as of March 31, 1999. The purpose of becoming an UPREIT was to allow the Company to offer Units in the Operating Partnership in exchange for assets from tax-motivated sellers. Under certain circumstances, the exchange of Units for a seller's assets will defer the tax liability 12 associated with the sale. This UPREIT structure allows the Company to use Units instead of stock or cash to acquire properties, which provides an advantage over non-UPREIT entities. ADVISOR TRANSACTION: Until early 1996, the Company was advised by Berkshire Realty Advisors ("Advisor"), an affiliate of certain directors and officers of the Company. The Board of Directors determined that it was in the best interest of the shareholders to become self-advised. As a self-advised REIT, the administration of the Company as well as strategic investment decision-making responsibilities are performed by senior management employed by the Company. Therefore, on February 28, 1996, the Board, acting on the recommendation of a Special Committee comprised of the independent members of the Board ("Independent Directors"), approved the acquisition of the Advisor, via contribution of the workforce and other assets of the Advisor, in exchange for 1.3 million Units which were valued at $13 million (the "Advisor Transaction"). The acquisition price together with related costs, was recorded as an intangible asset associated with the workforce acquired. The contribution was completed on March 1, 1996. As of that date, all charges and expenses associated with the Advisory Services Agreement ceased and the Company became a self-advised REIT. In conjunction with the Advisor Transaction, additional Units, up to a total of $7.2 million in value, may be issued to the former Advisor during a six year period if certain share price benchmarks are achieved. As of March 31, 1999, 209,091 additional Units have been issued as a result of achieving the $11.00 and $12.00 share price benchmarks. The value of the issued Units was recorded on the consolidated statements of operations as additional costs associated with the Advisor Transaction. PROPERTY MANAGER TRANSACTION: On February 13, 1997, a Special Committee of the Board of Directors comprised of the Independent Directors approved the acquisition of the workforce and other assets of an affiliate which provided multifamily property management services to the Company (the "Property Manager"). The Property Manager was contributed on February 28, 1997 in exchange for 1.7 million Units or approximately $17.6 million (the "Property Manager Transaction"). On the date of the transaction, the Property Manager managed 57 apartment communities, including 35 assets then owned by the Company, and employed approximately 85 professionals, excluding site employees. As a result of this transaction, the Company was no longer required to pay management fees and reimbursements for the management operations of its multifamily portfolio. In addition, the Company receives management fees and reimbursements of certain expenses associated with the third-party management contracts primarily with partnerships affiliated with certain directors and officers of the Company. The value of the Units issued was recorded on the balance sheet as an intangible asset associated with the acquisition of a workforce and third-party property management contracts. B. RESULTS OF OPERATIONS: The results of operations from period to period are impacted by acquisition and disposition activity within the portfolio. Comparisons will be made with respect to the overall portfolio and same-store properties. The Company defines same-store apartment communities as those assets that were owned and operated in each of the two most recent years. The following analysis compares the results of operations for the three month periods ended March 31, 1999 and 1998. NET LOSS for the three months ended March 31, 1999 increased approximately $3.6 million compared to the same period in 1998 as a result of an increase in loss from operations of $4.1 million and a decrease in gain on sales of assets of $513,000 which was offset by an increase in the loss allocation to minority interest of $1.1 million. 13 B. RESULTS OF OPERATIONS: - Continued INCOME AND EXPENSES: RENTAL INCOME AND PROPERTY OPERATING EXPENSES, including repairs and maintenance and real estate taxes, increased for the three month period ended March 31, 1999 in proportion to the increase in weighted average apartment units. Rental revenue for the three month period ended March 31, 1999 increased $9.6 million or 24%, over the prior year period, and property operating expenses increased $4.1 million or 27%, for the same period. Average apartment units increased 23% for the three month period ended March 31, 1999 over the prior year. Detail of the Company's apartment unit growth for the three months ended March 31 is set forth below:
1999 1998 ---- ---- Apartments Units: Beginning of period 24,123 18,773 Acquired 264 2,760 Sold - - Completed development units - - ------ ------ End of period 24,387 21,533 ------ ------ ------ ------ Weighted average apartment units 24,369 19,876 for period Percent increase over same period 23% 58% of prior year
MANAGEMENT FEES AND REIMBURSEMENTS decreased $154,000 for the three month period ended March 31, 1999 when compared to the same period in 1998 due to a reduction in the number of third party management contracts as a result of sales by third party owners. PROPERTY MANAGEMENT OPERATIONS increased $355,000 for the three months ended March 31, 1999 compared to the same period in 1998 as a result of increased operating costs in the Mid-Atlantic and Texas regions due to growth in the number of properties in those regions and severance payments incurred as a result of a reduction in administrative personnel located in the national operating headquarters. GENERAL AND ADMINISTRATIVE EXPENSES, decreased $246,000 for the three month period ended March 31, 1999 compared to the same period in 1998 primarily due to decreased employee salaries, benefits, administrative and office related expenses resulting from reductions in administrative and executive personnel located in the Boston and Baltimore offices, respectively. INTEREST EXPENSE Interest expense has increased for the three month period ended March 31, 1999 compared to the same period in 1998 primarily from increased average borrowings. The following is an analysis of weighted average debt outstanding and interest rates for the three months ended March 31 (dollars in thousands).
Three Months Ended March 31, --------------------------- 1999 1998 ---- ---- Weighted Average Debt Outstanding Fixed Rate $413,594 $379,597 Variable Rate 190,325 76,788 -------- -------- Total $603,919 $456,385 -------- -------- -------- -------- Weighted Average Interest Rates Fixed Rate 7.84% 7.87% Variable Rate 6.29% 6.85%
14 B. RESULTS OF OPERATIONS: - Continued Weighted average fixed rate debt increased approximately $148 million for the three months ended March 31, 1999 compared to the same period in 1998 primarily due to increased weighted average borrowings on the credit agreement to fund rehabilitations and renovations on the newly acquired multifamily communities. COSTS ASSOCIATED WITH STRATEGIC ALTERNATIVES represents appraisal costs, investment banking fees, legal, accounting and consulting fees related to the Company's preparation of a Plan of Liquidation and evaluation of other strategic alternatives. See Note 1 to the Consolidated Financial Statements for additional information. AMORTIZATION OF ACQUIRED WORKFORCE AND INTANGIBLE ASSETS associated with the Advisor Transaction in 1996 and Property Manager Transaction in 1997 decreased $583,000 for the three month period ended March 31, 1999 when compared to the same period in 1998 as the costs related to the Advisor Transaction were fully amortized by February of 1999. DEPRECIATION AND AMORTIZATION increased for the three month period ended March 31, 1999 compared to the same period in 1998 due to an increased property asset base. GAIN ON SALES OF ASSETS for the three month period ended March 31, 1998 resulted from the sales of three retail assets in 1998. There were no sales in the first quarter of 1999. C. FUNDS FROM OPERATIONS (FFO): Management and industry analysts generally consider Funds from Operations ("FFO"), to be an appropriate measure of the performance of an equity REIT, along with net income and cash flows from operating activities, financing activities and investing activities. The Company's FFO is presented to assist investors in analyzing the Company's ongoing operating cash flows which support dividends and recurring capital expenditures. However, FFO should not be considered by the reader as a substitute to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. The Company believes that in order to facilitate a clear understanding of the operating results of the Company, FFO should be analyzed in conjunction with net income (loss) as presented in the Consolidated Financial Statements and information presented elsewhere. FFO is determined in accordance with a resolution adopted by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT"), and is defined as net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. The methodology used by the Company when calculating FFO may differ from that of other equity REIT's and, therefore, may not be comparable to such other REIT's. In addition, FFO does not represent amounts available for management's discretionary use for needed capital replacement or expansion, debt service obligations or other commitments. 15 C. FUNDS FROM OPERATIONS (FFO): - Continued The following table presents the Company's FFO for the periods ended March 31:
Three Months Ended March 31, --------------------------------- 1999 1998 ----------- ----------- Loss from operations before joint venture income, gain on sales of assets, and minority interest $(5,738,137) $(1,664,005) Joint venture net operating income - 75,565 Amortization of intangible assets 2,675,316 3,258,049 Non-recurring charges 3,048,373 - Depreciation 15,804,008 12,449,700 Income allocated to preferred shareholders (1,539,563) (1,539,563) ----------- ----------- Funds from Operations $14,249,997 $12,579,746 ----------- ----------- ----------- ----------- Cash flows provided by (used for): Operating activities 10,179,191 14,473,524 Investing activities (30,748,097) (50,991,516) Financing activities 24,159,049 37,955,533
SAME-STORE MULTIFAMILY COMMUNITIES The Net Operating Income ("NOI") of the 65 same-store communities aggregating 18,773 units which are considered same-store is summarized below (dollars in thousands).
Three Months Ended March 31, ---------------------------------------- 1999 1998 % Change ------- ------- -------- Revenue $37,989 $36,448 4.2% Expenses 15,034 14,612 2.9% ------- ------- Net operating income $22,955 $21,836 5.1% ------- ------- ------- ------- Average monthly rent $698 $677 per unit Average physical 95.4% 94.4% occupancy
NOI for the same-store communities increased 5.1% for the three months ended March 31, 1999 compared to the same period in 1998. Growth in same-store multifamily revenue was 4.2% for the three months ended March 31, 1999 compared to the prior year period. Rent increases accounted for 3.1% of the increase and the remaining revenue gain was generated from increased occupancy. 16 D. LIQUIDITY AND CAPITAL RESOURCES: The Company's net cash provided by operating activities decreased $4.3 million for the three month period ended March 31, 1999 when compared to the same period in 1998 due to the costs associated with strategic alternatives of $3.0 million and the decrease in accrued expenses and other liabilities of $3.9 million. These decreases in operating cash flow were partially offset by the increased net operating income due to the increased weighted average apartment units in 1999 and increased net operating income generated by same-store multifamily communities of 5.1%. Net cash used for investing activities decreased $20.2 million for the three month period ended March 31, 1999 when compared to the same period in 1998. The decrease was due to a decrease in acquisitions of $46.9 million in 1999 and principal collections on the note receivable of $3.5 million. These were offset by decreased proceeds from sale of properties of $14.9 million and decreased distributions from joint venture assets of $15.4 million. Net cash provided by financing activities decreased $13.8 million due to reduced borrowings under the credit agreement and construction loan of $14.2 million. Cash flows from operations, debt financing and sales of assets are the primary sources of liquidity employed by the Company. In addition, in 1997, the Company raised additional capital through a private placement of preferred stock and a public offering of common stock, the proceeds of which were used to acquire multifamily properties and to pay down variable rate debt. Operating cash flows are earmarked for the payment of dividends as well as capital expenditures of a recurring nature. Debt financing, proceeds from asset sales and equity offerings have been used to finance the acquisition, renovation, rehabilitation and development of apartment communities. In each of the previous three years, the Company has paid between 81% and 86% of FFO in dividends, retaining the rest for recurring capital expenditures and working capital. On May 13, 1999, the Board approved a dividend of $.25 per share of common stock payable on August 15, 1999 to the shareholders of record on August 1, 1999. The Company has a policy to maintain leverage at or below 50% of the reasonably estimated value of assets. By employing moderate leverage ratios, the Company expects it can continue to generate sufficient cash flows to operate its business as well as sustain dividends to shareholders. The Company conservatively manages both interest rate risk and maturity risk. Through the use of a swap, the Company has hedged interest rate risk on $40 million of its outstanding variable rate debt as of March 31, 1999. Additionally, the Company has spread its maturities on long-term debt and has weighted average maturities of approximately 14 years. The Company has adequate sources of liquidity to meet its current cash flow requirements, including dividends and debt service. In order to fund ongoing renovation, rehabilitation and development activities, the Company has at its disposal unadvanced commitments under the construction loan, and, if necessary, could generate net proceeds from the sale of mortgage-backed securities or certain real estate assets. 17 E. BUSINESS CONDITIONS/RISKS: The Company believes that favorable economic conditions exist in substantially all of its real estate markets. For the Company's same-store apartment communities, physical occupancy was 97.3% as of March 31, 1999 which generally represents current market occupancies. In addition, the Company has generated competitive rental rates at its properties. The Company expects to produce consistent performance from its real estate assets; however, no assurances can be made in this regard. The Company's real estate investments are subject to some seasonal fluctuations resulting from changes in utility consumption and seasonal maintenance expenditures. Future performance of the Company may be impacted by unpredictable factors which include general and local economic and real estate market conditions, variable interest rates, environmental concerns, energy costs, government regulations and federal and state income tax laws. The requirements for compliance with federal, state and local regulations to date have not had an adverse effect on the Company's operations, and no adverse effects are anticipated in the future. The merger agreement the Company has entered into contains certain restrictions on the conduct of the Company's business during the term of the agreement. The Company is also involved in certain legal actions and claims in the ordinary course of its business. It is the opinion of management and its legal counsel that such litigation and claims should be resolved without any material effect on the Company's financial position. F. YEAR 2000 The Year 2000 compliance issue concerns the inability of computerized information systems to accurately calculate, store or use a date after 1999. This could result in a system failure or miscalculations causing disruptions of operations. The Year 2000 issue affects virtually all companies and all organizations. The Company has conducted an assessment of its core internal and external computer information systems and has taken the further necessary steps to understand the nature and extent of the work required to make its systems Year 2000 compliant in those situations in which the Company is required to do so. In this regard, the Company began a computer systems project in 1997 to significantly upgrade its existing hardware and software. The Company completed the testing and conversion of the financial accounting and property operating systems in February, 1998. As a result, the Company has generated operating efficiencies and believes it has remedied the programming issues associated with the Year 2000. The Company incurred hardware costs as well as consulting and other expenses related to infrastructure and facilities enhancements necessary to complete the upgrade and prepare for the Year 2000. The Company's cost of the systems conversion was approximately $600,000 and has been capitalized and is being amortized over five years. The Company is currently in the process of identifying, evaluating and remedying its Year 2000 compliance issues with respect to its non-financial systems, such as computer controlled elevators, security and heating, ventilating and air conditioning systems. The Company has completed its Year 2000 compliance initiatives at some of its properties and is in the process of completing these initiatives at others. Based on its identification and assessment efforts to date, the Company believes that certain of the computer equipment and software it currently uses will require modification or replacement. However, the Company does not believe that the future efforts to achieve its Year 2000 compliance initiatives will result in any material cost to the Company or significantly interrupt services or operations. The Company is in the process of evaluating the potential adverse impact that could result from the failure of significant third-party service providers and vendors to be Year 2000 compliant. No estimate can be made at this time as to the impact of the readiness of such third parties. However, if any of the third-party service providers or vendors ceases to conduct business due to Year 2000 related problems, the Company 18 F. YEAR 2000 - Continued expects to be able to contract with alternate providers without experiencing any material adverse effect on the Company's financial condition and results of operations. The most reasonably likely worst case scenario that could affect the Company's operating results and financial condition would be a power failure resulting in an interruption in utilities services (i.e. electricity, natural gas, telephone and water) provided by third-party vendors to the Company and its residents, affecting a substantial number of the geographic regions in which the Company's properties are located. Additionally, despite the Company's current efforts to be Year 2000 compliant, elevators, security and heating, ventilating and air conditioning systems may read incorrect dates and operate according to incorrect schedules. Although such scenarios would be disruptive to residents, they are not business critical and would not have a material adverse effect on the Company's operating results or financial condition. Accordingly, management does not believe that the Year 2000 problems will have a material adverse effect on the Company's financial condition or results of operations. Such belief is based on our analysis of the risks to the Company related to its potential Year 2000 problems and its assessment of the Year 2000 problems of our third party service providers. In any event, the Company expects to perform an analysis of the operational problems and costs (including loss of revenues) that would be reasonably likely to result, in a worst case scenario, from the failure by the Company and certain third party service providers to achieve Year 2000 compliance on a timely basis. To date, a contingency plan has not been developed for dealing with the most reasonably likely worst case scenario, however, the Company plans to complete such analysis and contingency planning. G. RECENTLY ISSUED ACCOUNTING STANDARDS Financial Accounting Standards Board Statement No. 131 ("FAS 131") "Disclosures about Segments of an Enterprise and Related Information" establishes standards for disclosing measures for profit or loss and total assets for each reportable segment. FAS 131 is effective for fiscal years beginning after December 15, 1997. Financial Accounting Standards Board Statement No. 132 ("FAS 132") "Employers' Capital Disclosures about Pensions and Other Postretirement Benefits" is effective for fiscal years beginning after December 15, 1997, although earlier application is encouraged. FAS 132 establishes standards related to the disclosure requirements for pensions and other postretirement benefits. Financial Accounting Standards Board Statement No. 133 ("FAS 133") "Accounting for Derivatives" is effective for fiscal years beginning after June 15, 1999. FAS 133 establishes standards related to the accounting and disclosure requirements of derivative financial instruments. The Company implemented FAS 131 and FAS 132 in 1998 and will adopt FAS 133 in the year 2000. H. FORWARD-LOOKING STATEMENTS This report on Form 10-Q contains forward-looking statements, estimates or plans. There are a number of factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include the matters set forth under the caption "Risk Factors" in the Company's Registration Statement on Form S-3, which was filed with the Securities and Exchange Commission on May 7, 1999, and which matters are incorporated herein by reference. Any statements contained in such filing shall be deemed to be superseded or modified for purposes of the Form 10-Q to the extent that a statement contained herein modifies or supersedes such statement. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. 19 BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION --------------- Item 1. Legal proceedings Response: None Item 2. Change in securities Response: None Item 3. Defaults upon senior securities Response: None Item 4. Submission of matters to a vote of security holders Response: None Item 5. Other information Response: None Item 6. Exhibits and reports on Form 8-K: EXHIBITS: 27.1 Financial Data Schedule - March 31, 1999 + 99.1 Documents incorporated by reference - "Risk Factors" from pages 4 through 14 of the Company's Registration Statement on Form S-3, which was filed with the SEC on May 7, 1999, setting forth the information under the caption "Risk Factors" + REPORTS ON FORM 8-K On April 15, 1999, the Company filed a Current Report on Form 8-K, dated April 13, 1999, announcing that the Company had entered into a definitive merger agreement with Berkshire Realty Holdings L.P. On March 5, 1999, the Company filed a Current Report on Form 8-K, dated March 4, 1999, announcing that the Company had received several offers to acquire the Company. + Filed herein. 20 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BERKSHIRE REALTY COMPANY, INC. ------------------------------ (Registrant) BY: /S/ MARIANNE PRITCHARD ------------------------------------- Marianne Pritchard, Executive Vice President and Chief Financial Officer of Berkshire Realty Company, Inc. (Principal Financial Officer) BY: /S/ DAVID F. MARSHALL ------------------------------------- David F. Marshall, President, Chief Executive Officer and Director of Berkshire Realty Company, Inc. DATE: May 17, 1999 21 EX-27.1 2 EXHIBIT 27.1
5 This schedule contains summary financial information extracted from Berkshire Realty Company's Financial Statements for the year ended March 31, 1999 and is qualified in its entirety by reference to such financial statements. 3-MOS MAR-31-1999 MAR-31-1999 15,957,023 10,857,659 15,810,742 0 0 25,561,349 955,058,275 0 1,023,245,048 29,652,398 609,662,907 65,656,537 0 322,260,033 (3,986,827) 1,023,245,048 0 50,282,480 0 0 44,803,339 0 11,217,278 0 0 (5,738,137) 1,551,928 0 (1,539,563) (5,725,772) (.16) (.16) Includeds MBS securities, Mortgage loans and Notes receivable. Includes escrows held. Includes Intangible Asset and Workforce acquired of 6,773,714 and other assets of 18,787,635. Includes properties held less depreciation. Includes Credit Agreements, Mortgages payable and Construction loan. Includes Minority Interest. Includes Preferred Stock, Common Stock, Additional Paid-In Capital and Accumulated deficit. Includes Loan receivable to Officer and Treasury Stock. Includes all revenue of the Company. Includes all expenses of the Company. Includes Minority Interest income. Includes income allocated to preferred shareholders.
EX-99.1 3 EXHIBIT 99.1 Exhibit 99.1 RISK FACTORS An investment in our common stock involves various risks. You should carefully consider the following risks and the other information in this prospectus before deciding to convert your units. TAX CONSEQUENCES OF EXCHANGE OF UNITS - YOU MAY INCUR TAX IF YOU CONVERT YOUR UNITS. If you decide to convert your units, you will be taxed as if you had sold the units. You will have taxable income equal to the amount of cash you receive or the value of the stock you receive, as the case may be, plus the amount of any BRI Partnership liabilities allocable to your units at the time you sell them. You may recognize more gain or have to pay more tax than the amount of cash or the value of the stock you receive from the sale. If you sell some or all of the stock you receive to raise money to pay the tax, the market price of the stock may have declined from the time when you converted your units. CHANGE IN INVESTMENT UPON REDEMPTION OF UNITS - IF YOU CONVERT YOUR UNITS, YOU WILL HAVE A DIFFERENT KIND OF INVESTMENT. If you convert some or all of your units, BRI Partnership will decide whether you receive cash or stock. If you receive cash, you will have no interest in Berkshire or BRI Partnership, except to the extent that you retain units, which means: - You will not benefit from any future increases in the value of Berkshire's stock. - You will not receive any future distributions from Berkshire or BRI Partnership. If you receive stock, you will become a shareholder of Berkshire rather than a partner in BRI Partnership. DEVELOPMENT AND ACQUISITION WE ACQUIRE NEW PROPERTIES FROM TIME TO TIME, AND THOSE ACQUISITIONS MAY REDUCE THE VALUE OF YOUR INVESTMENT. Berkshire regularly considers acquiring additional apartment communities. Acquisitions involve several risks, including the following: -1- - Acquired properties may not perform as well as Berkshire expected before acquiring them. - Improvements to the properties may cost more than Berkshire had estimated. - The costs of evaluating properties that are not acquired cannot be recovered. - Berkshire has acquired properties by issuing units and has had to agree with the sellers not to sell the properties or refinance the debt on them for various periods of time. These restrictions may keep us from taking actions that would otherwise be in the best interests of the shareholders. Berkshire may in the future acquire apartment communities for units and may have to agree to similar restrictions. WE DEVELOP NEW APARTMENT COMMUNITIES FROM TIME TO TIME, AND THESE ACTIVITIES MAY REDUCE THE VALUE OF YOUR INVESTMENT. Berkshire plans to continue developing new apartment communities as opportunities arise in the future. Development and construction activities entail a number of risks, including the following: - We may abandon a project after spending time and money determining its feasibility. - Construction costs may exceed the original estimates. - The revenue from a new project may not be enough to make it profitable. - Berkshire may not be able to obtain financing on favorable terms for development of a property. - We may not complete construction and lease up on schedule, resulting in increased costs. - Berkshire may not be able to obtain, or may be delayed in obtaining, necessary governmental permits. - Even successful projects require a substantial portion of management's time and attention. -2- WE ARE REQUIRED TO SUBMIT TO SHAREHOLDERS A VOTE REGARDING LIQUIDATION. Our charter requires the Board of Directors to prepare and submit to shareholders a proposal to liquidate Berkshire's assets and distribute the net proceeds to the shareholders. We have filed preliminary proxy materials with the SEC relating to this proposal. Berkshire will adopt the liquidation proposal only if shareholders holding a majority of the shares then outstanding approve it. If Berkshire were liquidated, you might receive proceeds that were less than the value of the stock at the time you converted your units. Submitting this proposal to shareholders will cause us to incur costs associated with the shareholder solicitation regardless of the outcome of the vote. THE INDUSTRY WE OPERATE IN HAS RISKS THAT MAY CAUSE YOUR INVESTMENT TO DECLINE IN VALUE. Owning real estate involves a variety of risks, including the risks described below: REALIZING A PROFIT FROM OWNING APARTMENT COMMUNITIES DEPENDS ON MANY FACTORS. Berkshire invests in apartment communities and therefore is subject to the various risks generally related to owning and developing real property. The value of Berkshire's apartment communities and our ability to distribute cash to shareholders will depend on how well we operate and develop our properties. These are some of the things that may adversely affect our results: - Changes in national and local economic conditions, such as oversupply of apartment units or reduction in demand for apartment units in our markets. - The attractiveness of our apartments to tenants. - Changes in interest rates and the availability, cost and terms of mortgage financings. - The ongoing need for capital improvements in our properties, particularly in older structures. -3- - Changes in real estate tax rates and other operating expenses. - Changes in governmental rules and fiscal policies and changes in zoning laws. - Civil unrest, acts of God, including natural disasters which may result in uninsured losses, acts of war and other factors beyond our control. OUR BUSINESS DEPENDS ON THE PERFORMANCE OF FOUR MARKETS. We have made almost all of our investments in Florida, Texas and the Mid-Atlantic and Southeastern United States. Therefore, Berkshire's results will depend to a great extent on the economic conditions in these markets as well as the market for apartment communities generally. REGULATIONS MAY CAUSE OUR COSTS TO INCREASE OR LIMIT OUR ABILITY TO INCREASE OUR REVENUE. Many federal, state and local zoning, subdivision, planning, building, environmental and other land use laws and regulations govern real estate. These laws and regulations may place significant restrictions on our ability to develop or improve our real estate. Even unintentional violations of these laws and regulations by us or by our tenants may force us to take corrective action or pay substantial penalties. In particular, various laws and regulations may restrict the amount and process by which we may raise rents, as well as our right to convert a property to other uses, such as condominiums or cooperatives. WE MAY LOSE SOME OF OUR PROPERTY TO CASUALTIES OR TAKINGS. Conditions existing on real property may result in injury to people. BRI Partnership may incur liability as a result of such injuries. Such liability may be uninsurable in some circumstances or may exceed the limits of insurance maintained at typical amounts for the type and conditions of the property. In addition, our properties may suffer loss in value due to causalities such as fire or hurricanes. These losses may be uninsurable in some circumstances or may exceed the limits of insurance maintained at typical amounts for the type and condition of the property. Should an uninsured loss occur, Berkshire could lose both its investment in and anticipated profits and cash flow from a property. Real estate may also be taken, in whole or in part, by public authorities for public purposes in eminent domain proceedings. Awards resulting from such -4- proceedings may not adequately compensate Berkshire for the value lost. WE MAY NOT BE ABLE TO SELL OUR ASSETS AT THE OPTIMAL TIME. Real estate investments are relatively illiquid. Our ability to vary our portfolio in response to changes in economic and other conditions will therefore be limited. If we must sell an investment, we may not be able to sell the investment in the time period we desire or at a price that will recoup or exceed the amount of our cost for the investment. OUR EXPENSES MAY INCREASE, RESULTING IN A DECREASE OF THE FUNDS AVAILABLE TO PAY DIVIDENDS TO SHAREHOLDERS. BRI Partnership must pay the expenses associated with operating its apartment communities. These expenses include: - cleaning - electricity - heating, ventilation and air conditioning - elevator repair and maintenance - insurance and administrative costs - other general costs associated with security, landscaping, repairs and maintenance If these expenses increase, the local rental market may limit the extent to which we may increase rents to meet these increased operating expenses without decreasing occupancy rates. If these operating expenses increase faster than rental rates, our results of operations, financial condition and ability to pay distributions to shareholders could be adversely affected. WE MAY INCUR COSTS IF WE DO NOT COMPLY WITH THE FAIR HOUSING AMENDMENTS ACT AND AMERICANS WITH DISABILITIES ACT. The Fair Housing Amendments Act imposes requirements related to access by physically handicapped persons on multifamily properties first occupied after March 13, 1991 or for which construction permits were obtained after June 15, 1990. If Berkshire does not comply with this statute, we might have to pay fines to the United States government or damages to private litigants. All of our properties must comply with the Americans with Disabilities Act to the extent such properties are "public accommodations" or -5- "commercial facilities," as defined by this statute. The law requires that facilities, including leasing offices, open to the general public be made accessible to people with disabilities. Individual apartment units are not considered public accommodations for these purposes . Compliance with this law's requirements could require removal of access barriers and other capital improvements to the public areas of Berkshire's properties. Noncompliance could result in imposition of fines by the United States government or an award of damages to private litigants. If any changes to our properties subsequently are required that involve material expenditures, our results of operation, financial condition and ability to make expected distributions to shareholders could be adversely affected. OUR JOINT VENTURE PARTNERS MAY HAVE DIFFERENT INTERESTS THAN WE DO, RESULTING IN A LOSS OF VALUE OF SOME OF OUR PROPERTIES OR AN INABILITY TO TAKE ADVANTAGE OF FAVORABLE OPPORTUNITIES. Any of our investments in a joint venture partnership which owns property may involve risks which would not be present in a direct investment in real estate. For example, our joint venture partner may experience financial difficulties and may at any time have economic or business interests or goals which are inconsistent with our business interests and goals or contrary to our policies or objectives. Our partner might take actions that would subject the property owned by the joint venture to liabilities in excess of those contemplated by the terms of the joint venture agreement. In addition, we might reach an impasse with our partner since either party may disagree with a proposed transaction involving the property owned by the joint venture and impede any proposed action. FINANCINGS WE MAY NOT BE ABLE TO MAKE THE REQUIRED PAYMENTS ON OUR DEBT. As of March 31, 1999, we had approximately $609,663,000 of total debt. Payments of principal and interest on mortgage borrowings may leave us with insufficient cash resources to operate our apartment communities or pay distributions required to be paid in order for us to maintain our qualification as a REIT. If we cannot make payments on a loan secured by a mortgage, the lender could foreclose on the property securing the loan. If this happens, Berkshire will lose the income from the property and any value the property had. Even if a loan is nonrecourse, the lender might -6- have the right to recover deficiencies arising from fraud, environmental liabilities or other circumstances. Foreclosure could also create taxable income without producing any cash, thereby reducing our cash available for distribution and hindering our ability to meet the tax requirements for a REIT. In connection with acquiring 39 properties in exchange for units, we agreed to maintain prescribed levels of nonrecourse debt on these properties. The purpose of these agreements was to minimize the tax consequences of the acquisitions to the unit recipients. If we do not maintain the required level of debt, we would be in default under these agreements and could be liable to the holders of the units. WE MAY NOT BE ABLE TO REFINANCE OUR DEBT WHEN IT COMES DUE. When any of our debt secured by real property comes due, we will have to refinance the debt or sell the property that secures the debt. If the interest rate on the new debt is higher than the rate on the old debt, our costs will increase. Our ability to refinance any of this debt and the terms on which we might refinance will depend upon economic conditions in general and specifically on conditions in the capital markets. We cannot guarantee that we could refinance or repay any of these mortgage loans at maturity. WE DO NOT HAVE A LIMIT ON HOW MUCH DEBT WE CAN INCUR. We currently have a policy of incurring debt only if upon such incurrence the ratio of Berkshire's debt to the value of its assets would be 50% or less. Although we have adopted this policy, Berkshire's governing documents contain no limitation on the amount of indebtedness Berkshire may incur. Accordingly, the Board of Directors could alter or eliminate this policy and would do so, for example, if it were necessary for Berkshire to continue to qualify as a REIT. THE INTEREST RATES OF OUR CREDIT FACILITY MAY INCREASE, WHICH WOULD RESULT IN A REDUCTION OF FUNDS AVAILABLE TO PAY DIVIDENDS TO SHAREHOLDERS. Outstanding advances under our credit facility bears interest at a variable rate. As of March 31, 1999, this credit facility had an outstanding balance of $173,100,000. We may incur additional variable rate indebtedness in the future. Accordingly, increases in interest rates could increase Berkshire's interest expense, which could adversely affect Berkshire's results of operations, financial condition and ability to pay -7- expected distributions to shareholders. An increase in interest expense could also cause us to be in default under our credit facilities. POTENTIAL ENVIRONMENTAL LIABILITY - OUR PROPERTIES MAY HAVE ENVIRONMENTAL CONTAMINATION, WHICH COULD REDUCE THE VALUE OF YOUR INVESTMENT. Various federal, state and local environmental laws, ordinances and regulations subject property owners or operators to liability for the costs of removal or remediation of some hazardous or toxic substances on the property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. The presence of, or the failure to properly remediate, such substances may adversely affect our ability to sell or rent the property or to borrow using the property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Third parties may seek recovery from owners or operators of such properties or persons who arranged for the disposal or treatment of hazardous or toxic substances. Therefore, owners and operators are potentially liable for removal or remediation costs, as well as other related costs, including governmental fines and injuries to persons and property, related to such facilities. ANTI-TAKEOVER PROVISIONS - BECAUSE OUR GOVERNING DOCUMENTS CONTAIN PROVISIONS THAT MAY INHIBIT A TAKEOVER OF BERKSHIRE, YOU MAY NOT HAVE THE OPPORTUNITY TO REALIZE A PREMIUM ON YOUR INVESTMENT. Our charter places restrictions on the accumulation of shares in excess of 9.8% of the number of outstanding shares of common stock, subject to exceptions permitted with the approval of the Board of Directors to allow (1) underwritten offerings, or (2) the sale of equity securities in circumstances where the Board of Directors determines Berkshire's REIT federal tax status will not be jeopardized. This ownership limitation may: - discourage a change in control of Berkshire. - deter tender offers for the common stock, which offers may be advantageous to shareholders. -8- - limit the opportunity for shareholders to receive a premium for their shares of common stock that might otherwise exist. Under Berkshire's charter, the election of directors is staggered such that approximately one-third of the directors are elected to three-year terms each year. This provision may discourage a change in control of Berkshire. In addition, the governing documents require a supermajority vote to amend those portions of the governing documents which concern: - the definition of "supermajority". - the requirements for amending the governing documents. - the requirements regarding excess share ownership. - the actions which require a supermajority vote. - the requirements regarding business combinations. Additional provisions of the governing documents restrict the shareholders' ability to nominate candidates for election as directors and to alter, amend and adopt provisions inconsistent with, or to repeal some provisions of, the governing documents. In addition, Berkshire is subject to Section 203 of the Delaware General Corporation Law, which restricts business combinations between Berkshire and its shareholders. Any of the provisions discussed above may have the effect of delaying, deferring or preventing a transaction or change in control of Berkshire that might involve a premium price for the shares of common stock or that otherwise might be in the best interest of our shareholders. Berkshire has an authorized class of 60,000,000 shares of preferred stock. Currently Berkshire has approximately 2.7 million shares of its 1997 Series-A Preferred Stock outstanding. The Board of Directors may issue the remaining 57.3 million shares on such terms and with such rights, preferences and designations as the Board may determine. Issuance of such preferred stock, depending on its rights, preferences, and designations, may have the effect of delaying, deterring, or preventing a change in control of Berkshire. OUR GOVERNING DOCUMENTS CONTAIN NO RESTRICTIONS ON THE TYPES OF INVESTMENTS WE MAY MAKE, WHICH MAY RESULT IN A -9- PORTFOLIO SIGNIFICANTLY DIFFERENT FROM THE ONE IN EXISTENCE AT THE TIME YOU ELECT TO CONVERT YOUR UNITS. Berkshire's Board of Directors may change its investment policies without a vote of the shareholders. Consequently, shareholders will have no direct control over the kinds of investments Berkshire makes. TAX WE MAY FAIL TO QUALIFY AS A REIT, WHICH WOULD RESULT IN A REDUCTION OF FUNDS AVAILABLE TO DISTRIBUTE TO SHAREHOLDERS. To maintain our status as a REIT, we must continually meet specified criteria concerning, among other things, our common stock ownership, the nature of our assets, the sources of our income and the amount of distributions we make to shareholders. If we fail to qualify as a REIT, we would not be allowed a deduction for distributions to shareholders in computing our taxable income and would be taxed on our income at regular corporate tax rates. If our status as a REIT were terminated, we might not be able to elect to be treated as a REIT for the following five-year period. Therefore, if we lose our REIT status, the funds available for distribution to you would be reduced substantially for each of the years involved. BECAUSE THE TAX LAWS REQUIRE US TO DISTRIBUTE MOST OF OUR TAXABLE INCOME, WE MAY HAVE TO BORROW ADDITIONAL FUNDS OR FORGO OTHER USES OF OUR CAPITAL. To qualify as a REIT, we generally are required each year to distribute to our shareholders at least 95% of our taxable income, excluding any net capital gain. In addition, Berkshire is subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by it with respect to any calendar year are less than the sum of: - 85% of its ordinary income for that year, - 95% of its capital gain net income for that year, and - 100% of its undistributed taxable income from prior years. We may have to borrow funds on a short-term basis to meet the 95% distribution requirement and to avoid the nondeductible excise tax. The requirement to distribute a substantial portion of our net taxable income -10- could cause us to distribute amounts that otherwise would be spent on future acquisitions, capital expenditures or repayment of debt. In that event, we might have to borrow funds or sell assets to fund the costs of such items. IF BRI PARTNERSHIP FAILS TO QUALIFY AS A PARTNERSHIP, WE WILL HAVE LESS CASH AVAILABLE FOR DISTRIBUTION TO STOCKHOLDERS. We have not requested, and do not expect to request, a ruling from the Internal Revenue Service that BRI Partnership and each of its noncorporate operating subsidiaries will be classified as partnerships for federal income tax purposes. If the agency were to successfully challenge the tax status of BRI Partnership or any noncorporate operating subsidiary as a partnership for federal income tax purposes, BRI Partnership or the noncorporate subsidiary would be taxed as a corporation. If that happened, Berkshire would likely cease to qualify as a REIT for a variety of reasons. Furthermore, the imposition of a corporate income tax on BRI Partnership would reduce substantially the amount of cash available for distribution from BRI Partnership to Berkshire and its shareholders. CHANGES IN TAX LAW MAY AFFECT THE VALUE OF OUR ASSETS AND YOUR INVESTMENT. The current federal income tax treatment of an investment in Berkshire may be modified, prospectively or retroactively, by legislative, judicial or administrative action at any time. In addition to any direct effects which such changes might have, such changes might also indirectly affect the market value of all real estate investments and, consequently, our ability to realize our business objectives. FORWARD-LOOKING STATEMENTS Some of the information in this prospectus may contain forward-looking statements. Any statements that are not statements of historical fact may be forward-looking statements. Words such as "believes," "may," "anticipates," "plans," "expects," "intends," "estimates" and similar expressions are intended to identify forward-looking statements. When considering such forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this prospectus. The risk factors noted in the section titled "Risk Factors" and other factors noted throughout this prospectus, including risks and uncertainties, could cause our actual results to differ materially from those indicated by any forward-looking statement. -11- -----END PRIVACY-ENHANCED MESSAGE-----